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Bloated IPO syndicates: no one wins, again

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By Clare Hammond
29 Apr 2014

Investors blame the banks, banks blame the issuers, and everybody hopes the regulator will step in to save the day. But if companies are to stop hiring the entire street for Hong Kong IPOs, the incentives for bankers need to change.

Pork processor WH Group’s debut on the Hong Kong exchange, which boasted a record 29-strong syndicate, finally collapsed on Tuesday night. The valuation was too high. Investors flinched from their verbal commitments amid a corporate governance controversy over the long Easter weekend. Bankers had had to cut the deal size by more than half in a last desperate effort.

Some have found the cause hard to pin down: many banks on the deal concluded that the issuer was too pushy and dictatorial. But other critics have not looked much further than the bloated syndicate.

The speed at which bankers jumped to vilify management is indicative of a market in which the long-term relationship between bookrunner and issuer has become less important than the messy business of gaining league table credit.

The result is that relationship-building is becoming increasingly slapdash. Yes, issuers are also to blame, tempted by the prospect of a lengthy roster of firms at their beck and call. They come to Hong Kong knowing they can hire as many banks as they like. But bookrunners often put their junior bankers on the job, everybody is mandated, but nobody takes control.

The upshot can be — as it has been for WH Group — a bad deal, negative press and frustrated investors.

Despite complaints from all sides, no one seems to show much willingness to change things. Syndicate bankers hope that other corporates looking to list will watch the fiasco from the sidelines and reconsider their own approach.

That's optimistic, particularly as bankers have spent so much time trying to convince everybody that WH Group’s failure was mostly the issuer’s fault (albeit helped by those other banks, of course, the irresponsible ones). Companies looking to list are, in the main, new to the capital markets. One would like them to be ruthless in managing their banks, but the reality is that they are likely to follow what they are told is normal practice.

Investors arguably have little incentive to take a stand. Many might well be frustrated with the wasted time spent fielding calls from banks pitching the same transaction, but few want to stick their neck out. Boycotting a deal because it has too many bookrunners would make an investor look ridiculous and would have limited market impact.

Regulators and the exchange also have a limited role to play. Some on WH Group’s IPO said that the Hong Kong Stock Exchange would now have to sit up and take notice. How? Should the HKEx be implementing new rules every time the market becomes inefficient?

No, it's the banks that need to show restraint. They could start by tackling the ludicrous importance attached to league table credit. Bankers regularly insist that the clients don't care about them, but right now telling your boss you have worked on 10 deals in a month, putting you top three, is certainly a more attractive proposition than explaining why you turned them all down.

That means the message of what the priorities should be needs to come from senior management, who ought to be enlightened enough to understand why it matters. No one expects banks to be selfless — it's a competitive industry. But their reputations are on the line too: no one benefits from deals going wrong.

Some banks reckon they are doing precisely that, telling staff that it's getting the bulk of the economics that matters, not just league table. That's all well and good — apart from when the deal gets scrapped.

There needs to be a cultural shift, one in which a longstanding client relationship is again put at the heart of the business, not the crowing over one-deal stands like notches on a bedpost.

Since the financial crisis, pretty much every bank claims to buy into this notion. But the reality of syndicate rosters tells a different story. Clients need to wake up to this too, but advisers are there to advise. Doing that properly would have a bigger effect on the profitability of the business than anything else.

By Clare Hammond
29 Apr 2014